FIRPTA HISTORY, RECENT REFORMS & REPEAL EFFORTS
During the American farm crisis more than thirty years ago, Congress passed legislation to discourage overseas investors from buying American cropland. FIRPTA imposed a 35% capital gains tax on international investors with an interest in any type of U.S. commercial property and some residential property too. This recently amended but still punitive tax remains a significant barrier to new investments that could help America grow given that no other asset class or industry is burdened by this negative tax treatment.
Proposals to reform and repeal FIRPTA are not new and enjoy widespread bipartisan support. Senator Malcolm Wallop (R-WY), originally introduced it 1980 to protect Wyoming farmland from being acquired by foreigners. He and others soon realized, the detrimental effect on the economy, later stating that “FIRPTA has grown into a gorilla which terrorizes foreign investors, treaties, and the free market, to the detriment of all but the tax technicians.” Senator Wallop himself supported a FIRPTA repeal bill in 1984 and also introduced legislation that would have repealed FIRPTA in 1985.
The Senate Finance Committee also approved full FIRPTA repeal in 1986, noting that the “FIRPTA rules…reduce aggregate demand for U.S. real property and, therefore, lower its price to the disadvantage of prospective U.S. sellers.” FIRPTA reforms also overwhelmingly passed the U.S. House of Representatives in 2010 by a 402-11 vote and received similarly strong bipartisan support in the Senate Finance Committee.
Over a nearly 3-year period, The Invest in America Coalition worked tirelessly with a bipartisan group of legislators in the House and Senate including Rep. and current House Ways & Means Committee Chairman Kevin Brady (R-TX), Rep. Pat Tibieri (R-OH) and Rep. Joe Crowley (D-NY) and Senators Mike Enzi (R-WY), Bob Menendez (D-NJ), Maria Cantwell (D-WA) and Johnny Isakson (R-GA).
These efforts led to the introduction of the Real Estate Investment and Jobs Act of 2015 (REIJA) that contained significant reforms to FIRPTA. The legislation secured 21 bipartisan cosponsors on the Senate Finance Committee and 35 co-sponsors on the Ways & Means Committee. Due in part to the Coalition’s intense legislative and grassroots efforts, The PATH Act of 2015 (‘The Act”) included two of REIJA’s long sought FIRPTA reform provisions:
- Exempting “qualified foreign pension funds” and entities wholly owned by such funds from FIRPTA equalizing the tax treatment of domestic and foreign pension funds.
- Expanding the FIRPTA exemption available to small foreign “portfolio investors.” Under prior law, foreign investors owning 5% or less of a publicly traded REIT were not subject FIRPTA. The Act increased this ownership threshold from 5 to 10% bringing the FIRPTA regime in line with the definition of a portfolio investor used in most U.S. tax treaties.
Independent industry experts have confirm that these long-sought though relatively modest reforms generated tens of billions of dollars in new foreign investment in the U.S. There are already very encouraging signs. Foreign capital investment into Charlotte, NC for 2016 was up 29.8%. Markets such as Nashville and Memphis also had increases of 20.8% and 13.4% respectively according to a 2016 study by Newmark Grubb Knight Frank Research. A similar 2016 survey taken among AFIRE members revealed that most of this new foreign investment went into U.S. industrial properties and multifamily sectors, followed by commercial office buildings.
To build on our FIRPTA reform successes included in the 2015 PATH Act, the Coalition continues to pursue a dual legislative and administrative advocacy strategy. Over the past 18 months, IAC has actively worked with our bipartisan Congressional allies towards formal introduction of stand-alone legislation that would fully repeal FIRPTA. Transportation Secretary Elaine Chao and other senior Congressional & Administration leaders have privately and publicly stressed the importance of FDI in U.S. infrastructure and argued that institutional investors remain a largely untapped source of substantial investment. Given this reality and supporting economic data, IAC’s key legislative and Administration allies have stated their desire to repeal FIRPTA.
In light of this momentum, IAC was instrumental in organizing a joint letter last May from 10 leading real estate industry associations to House Ways & Means Committee Chairman Kevin Brady formally requesting full FIRPTA repeal. We are pleased to report that due to the efforts of our Congressional allies; primary co-sponsors Reps. Kenny Marchant (R-TX) and Joseph Crowley (D-NY) officially introduced full FIRPTA repeal legislation (‘The Invest in America Act”, H.R. 6726) on September 6, 2018. We are working with our legislative and IAC partners to secure what we expect will be numerous additional co-signers in the coming weeks and months.
The Coalition is also actively coordinating efforts aimed at withdrawing Section Two of Treasury Notice 2007-55 which has long been a source of uncertainty and consternation from the foreign investor community. Prior to Notice 2007-55, well-established U.S. tax law provided that liquidating distributions by real estate investment trusts (“REITs”) to foreign shareholders were treated as sales of stock. Under this rule, liquidating distributions made by a REIT were treated in the same way as liquidating distributions made by any other corporation. Notice 2007-55, however, concluded that REIT liquidating distributions should generally be treated as capital gain distributions subject to FIRPTA, but only for foreign investors. Withdrawal of the Notice and reinstatement of prior law interpretations would provide greater parity and certainty to investors while also encouraging desperately needed FDI in the U.S. real estate market. In late 2017, the Coalition and our allies worked with a bipartisan group of House Ways and Means Committee members to send a letter to Treasury Secretary Mnuchin requesting that the Department formally withdrawal Section 2 of the Notice. In all, 34 bipartisan Committee members co-signed the letter.
Importantly, the $1.3 trillion Consolidated Appropriations Act of 2018 (“Omnibus Bill”, enacted in March,) contained several favorable FIRPTA clarifications from the Tax Technical Corrections Act of 2016 (H.R. 6439) that IAC and our partners advocated to help resolve ambiguities to the reforms included in the PATH Act reforms; most importantly exemption definitions for qualified foreign pension funds (QFPFs).